As we noted previously, the Small Business Administration’s (SBA) final rule updating the qualification requirements for the 8(a) Business Development (BD) Program will go into effect on July 15, 2020. Importantly, for individuals considering the 8(a) BD Program, the final rule will increase thresholds for qualifying as “economically disadvantaged” and remove prior distinctions between initial and continuing eligibility. These key updates are summarized below.
Qualifying for the 8(a) BD Program
Generally, a business is eligible for the 8(a) BD Program if the business:
- Is a small business that has not participated in the 8(a) BD Program before;
- Is at least 51% owned and controlled by U.S. citizens who are economically and socially disadvantaged;
- The economically and socially disadvantaged owner manages the day-to-day operations of the business and makes long-term decisions for the business;
- All principals of the business demonstrate good character; and
- The business shows potential for success and is able to perform successfully on contracts.
Regarding whether an individual is “economically disadvantaged,” the below updates amend 13 C.F.R. § 124.104 to increase the dollar thresholds to qualify as such and remove prior distinctions related to initial and continuing eligibility.
- Net Worth
Current Rule: Under 13 C.F.R. § 124.104(c)(2), an individual claiming economic disadvantage must have a net worth of less than $250,000. To continue eligibility in the 8(a) BD Program, their net worth may not exceed $750,000.
Update: Beginning July 15, 2020, the SBA will no longer make a distinction between initial eligibility and continuing eligibility for an individual’s net worth. Instead, the individual claiming an economic disadvantage must have a net worth of less than $750,000. In calculating net worth, the SBA will exclude funds invested in an Individual Retirement Account (IRA) or other official retirement account, irrespective of the individual’s age.
- Personal Income for the Past Three Years
Current Rule: Under 13 C.F.R. § 124.104(c)(3), an individual claiming economic disadvantage must have an average yearly income that does not exceed $250,000 prior to participating in the 8(a) BD Program. To remain eligible, average income may not exceed $350,000.
Update: Beginning July 15, 2020, the SBA will make no distinction between initial and continuing eligibility thresholds for an individual’s personal income. The SBA will presume that there is not an economic disadvantage if the gross income averaged over the three preceding years exceeds $350,000.
- Fair Market Value of All Assets
Current Rule: Under 13 C.F.R. § 124.104(c)(4), an individual claiming economic disadvantage will likely not qualify if the fair market value of their assets exceeds $4 million at the application stage and $6 million to remain eligible.
Update: Beginning July 15, 2020, the SBA will make no distinction between initial and continuing eligibility thresholds for the fair market value of assets. The SBA will consider an individual as economically disadvantaged if the fair market value of their assets does not exceed $6 million.
Bradley will continue to monitor and report on this noteworthy development. If you have any questions about the SBA’s final rule or any related issues, please feel free to contact Aron Beezley or Sarah Osborne.
Special thanks to summer associate Lillie Hobson, who assisted in the research and authorship of this blog post.